In terms of history and novelty, no stock index takes precedence over the Dow Jones Industrial Average (^DJI +0.69%). The Dow is the second-oldest stock index in the U.S., trailing only the Dow Transportation Index, and it recently celebrated its 122nd birthday.
But for as revered as the Dow is, it's also a pretty useless index with regard to tracking the health of the U.S. stock market. It has just 30 components, meaning some industries have little or no representation, and more importantly, it's a price-weighted index. This means that share price, not market cap, determines how much influence a component has within the index. Thusly, Boeing and its nearly $335 share price has close to 10 times the influence of drugmaker Pfizer, which has a share price of around $37 (yet, incidentally, a larger market cap than Boeing by about $20 billion).
Image source: Getty Images.
Intriguing facts about America's truest stock benchmark, the S&P 500
If we want a truly encompassing benchmark to track the health of the U.S. stock market and economy, then the broad-based S&P 500 (^GSPC +1.05%), with its representative 500 companies from a variety of industries and sectors, is our best choice.
Like the Dow, the S&P 500 is rich in history, as well as interesting facts. Here are, in no particular order, seven fascinating facts you may not have known about the S&P 500.
1. Originally, it didn't contain 500 companies
A little more than 61 years ago, on March 4, 1957, the S&P 500 we know today took shape. Back then, as it is today, the Index was comprised of 500 companies. But the S&P 500 hasn't always tracked 500 companies. When it was first introduced in 1923, it was simply known as the "Composite Index" and tracked the performance of a relatively small number of companies. This was expanded in 1926 to include 90 stocks, which was the number it stuck with until its expansion to 500 companies in March of 1957.
Image source: Coca-Cola.
2. There's been a lot of turnover, yet many familiar faces remain
As you might have rightly imagined, there's been quite a lot of turnover in the S&P 500 since March 1957. An S&P Dow Jones Indeces committee is responsible for reviewing and replacing companies in the S&P 500 on a regular basis to ensure the Index reflects the dynamic nature of the U.S. economy as closely as possible.
According to a Bloomberg report from March 2007, 50 years after the modern-day S&P 500 came into existence, there were 86 original members still remaining. Though this figure has likely fallen over the past 11 years thanks to mergers, acquisitions, bankruptcies, and removal decisions from the committee, there are still dozens of companies that've been a part of the S&P 500 for more than 61 years and counting. Examples include Coca-Cola, Merck, Pfizer, PepsiCo., and Kroger, to name a few.
3. Technically, there are more than 500 stocks included in the S&P 500 right now
Here's a weird fact to share with your friends at parties: Technically, the S&P 500 tracks more than 500 stocks. Though the index is limited to 500 companies, some companies have issued more than one class of stock, meaning the index tracks two or more of these classes. As of July 2018, the S&P 500 actually tracked 505 stocks.
As an example, in 2014, Google, which is now known as Alphabet (GOOG +2.20%)(GOOGL +2.12%), issued a new class of stock. The pre-existing Class C shares (GOOG) have no voting rights, while the 2014-issued Class A shares (GOOGL) have one vote per share. Because Alphabet is such a mammoth of a company, its inclusion in the S&P 500 makes sense...but only if both classes of its stock are tracked by the S&P 500.
Image source: Getty Images.
4. There are stringent criteria for inclusion in the Index
Though the committee has the ultimate say on what companies are included and removed from the S&P 500, there are some pretty clear guidelines for inclusion. The selection criteria include:
- A market capitalization in excess of $6.1 billion.
- Annual dollar value traded to float-adjusted market cap is greater than 1.0.
- Minimum monthly trading volume of 250,000 shares in each of the six months leading up to committee review.
- Must be a publicly listed company on a major U.S. exchange (no over-the-counter (OTC) stocks).
- Certain securities are ineligible, such as limited partnership, master-limited partnerships, OTC stocks, preferred stock, royalty trusts, and exchange-traded
5. Its 10 largest components comprise more than 21% of the Index
Even though the S&P 500 doesn't fall victim to the uselessness of price-weighting, it's still heavily influenced by a relatively small number of components. As of July 5, 2018, the largest 10 components accounted for more than 21% of the S&P 500's weighting:
- Apple: 3.924345%
- Microsoft: 3.300070%
- Amazon.com: 2.947227%
- Facebook: 2.049400%
- Berkshire Hathaway Class B: 1.553777%
- JPMorgan Chase: 1.520523%
- ExxonMobil: 1.500398%
- Alphabet Class C: 1.469428%
- Alphabet Class A: 1.467526%
- Johnson & Johnson: 1.443485%
In other words, like the Nasdaq, technology plays a key role in influencing the Index.
Image source: Getty Images.
6. The S&P 500 has undergone three dozen corrections since 1950
While we often think of the stock market as a wealth creator, it's worth noting that downtrends and corrections -- defined as at least a 10% move lower from a recent high -- actually happen quite often.
According to data from stock market analytics company Yardeni Research, the S&P 500 has undergone 36 corrections since the beginning of 1950, or about one every two years. Though bear markets are less common -- just three in the past 36 years -- downside in the stock market is inevitable.
Yet, interestingly enough, 22 of these 36 corrections have found their bottom within 104 days or less. Only on seven occasions since 1950 has a correction lasted longer than 288 days, and it's only happened twice since 1982 (the dot-com bubble and the Great Recession). In other words, corrections, while common in the S&P 500, tend to be short-lived.
7. It's a model of long-term consistency
Last but not least, let's look at the other side of the equation: the S&P 500's long-term consistency.
Despite being prone to corrections every so often, at no point would an investment in the S&P 500 for a period of 20 years have produced a loss. What's more, with the exception of the correction that occurred earlier this year, all previous 35 corrections since 1950 have been completely erased by bull market rallies.
In short, the broad-based S&P 500 has demonstrated that patience pays off over the long run.
